Pound Plummets as UK Economy Contracts: Rate Cut Speculation Rises

The British pound dropped after the UK's economy unexpectedly shrank by 0.1% in October. This contraction, the first since COVID-19 lockdowns, may lead to Bank of England rate cuts. Sterling fell against the euro, while business data shows worsening conditions in manufacturing and employment sectors.

The British pound experienced a decline on Friday following news that the UK's economy shrank unexpectedly in October. This contraction has fueled speculation about potential rate cuts by the Bank of England in the coming year. Data from official sources indicated that economic activity decreased by 0.1% in October, contrary to a predicted 0.1% rise according to a Reuters poll.

This marks the first consecutive month of decline since the COVID-19 pandemic's onset in 2020 and Britain's initial lockdown. After the economic data release, sterling fell as much as 0.43% and remained down 0.3% at $1.2635. Market analysts are now considering further restrictions on any sell-off of the pound and a rally in gilts. The interplay between wages, inflation, and BOE policy compared to the Fed and ECB is seen as a critical factor.

The pound also dropped by 0.4% against the euro, continuing its upward streak for the second consecutive month as the euro weakens. The difference in projected interest rates between the UK and the eurozone contributes to this trend. Recent business activity data reveal struggles in the manufacturing sector, rising grocery inflation, and a sputtering labor market, further complicating the economic landscape.

(With inputs from agencies.)